A clear call for a higher NGDP level target

Robert Samuelson writes: “The investment bust (explained)”:

One of the great disappointments of the weak economic recovery has been the sluggish revival of business investment — spending on new buildings, factories, equipment and intellectual property (mainly research and development, and software). For the United States, this spending in 2014 was about 9 percent above its 2007 record high. Sounds good? It isn’t. The average annual gain is a bit more than 1 percent over the past seven years. It is only a small stretch to say that capital has gone on strike.

Why? Can anything be done about it?

We now have a new study from the International Monetary Fund (IMF) that suggests some not very encouraging answers. For starters, it confirms that the investment bust is a global phenomenon. It’s not just the United States but also Europe, Japan and most advanced countries. As important, the main cause of the investment slump is clear-cut: Businesses aren’t expanding because they can already meet most demand with existing capacity.

“Business investment has deviated little, if at all, from what could be expected given the weakness in economic activity in recent years,” the IMF concluded.

The result is a vicious cycle: A weak economy inspires lackluster investment, and lackluster investment perpetuates a weak economy.

Could we jolt business investment from its lethargy? The IMF suggests that more economic “stimulus” (a.k.a., bigger budget deficits) would boost business investment by shrinking excess capacity. Perhaps. But it’s also possible that temporary stimulus plans — as most are — wouldn’t generate much more private investment precisely because corporate managers would see them as fleeting. Why expand to serve demand that won’t last?

If that´s not a call for a higher target level of NGDP (aggregate demand) I don´t know what is!

Low Investment


2 thoughts on “A clear call for a higher NGDP level target

  1. Meeting demand is not the only reason for private investments. Businesses invest also to increase profitability (e.g. aggregate productivity). If more profitability growth opportunities can somehow be created, are at least not supressed, more investment may happen. Also, one may have capital restrictions, one may want to invest, but can’t, because somehow he or she cannot secure the resources to do it …

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